News: No input tax credit for 99-year lease: AAAR-20-01-2022
Most companies and hotels pay GST at 18% on lease rentals and claim credit to reduce their tax outgo. Also in many instances the leased properties are treated as owned ones and the rights are transferred when the property is sold or bought by new owners.
In what could impact several companies and hotels, an Appellate Authority for Advance Ruling (AAAR) has denied input tax credit under the Goods and Services Tax (GST) framework on leasing of land and property
Most companies and hotels pay GST at 18% on lease rentals and claim credit to reduce their tax outgo. Also in many instances the leased properties are treated as owned ones and the rights are transferred when the property is sold or bought by new owners.
The Tamil Nadu AAAR denied the input tax credit to Inox Air Products, a medical gas manufacturer, on leasehold rights acquired for air-separation-unit construction.
The ruling could result in additional scrutiny and notices for several companies and even hotels that work on lease models, say tax experts.
“GST on lease rental is a huge cost and not all businesses are run on owned land and property. Therefore, there is a good argument that, where land or property taken on lease is used for running the business, going by the intent of introduction of GST, credit should be allowed.” said Harpreet Singh, Partner, Indirect taxes at KPMG in India.
The company had entered into an agreement for lease of an area of land for a period of 99 years.
An air separation was installed and commissioned with foundation and structural support, embedded on the land, the leasehold rights of which were obtained by the company. Without having the leasehold rights, the company cannot undertake ‘construction’ of the manufacturing Plant, the company said as per the AAAR application
The company had first approached the Authority of Advanced Ruling (AAR) that had ruled that input tax credit cannot be availed in the given situation. The company had challenged the ruling in AAAR thereafter.
The AAAR upheld the AAR ruling and defined the input tax credit benefit.
“Also, one needs to note that in this case credit was denied as the land was used for construction. Would the conclusion be the same, where land and building is taken on lease and used in business without any construction,” said Singh.
